May 21 (Bloomberg) -- Stephen Stanley, chief economist at
Pierpont Securities LLC, has derided the Federal Reserve for
downplaying improvement in the U.S. economy. Yet his 2.6 percent
forecast for growth this year is below the midpoint in the
central bank’s projection of 2.4 percent to 2.9 percent.

Stanley’s not alone: The median of 55 estimates compiled
this month by Blue Chip Economic Indicators for 2012 is 2.3
percent. All but 16 of the predictions were below the bottom of
the Fed’s so-called central tendency. JPMorgan Chase & Co.’s
Michael Feroli, John Lonski of Moody’s Capital Markets Group and
Wells Fargo Securities LLC’s John Silvia all are relatively more
cautious on growth than the policy makers.

The disconnect between the Fed’s optimistic forecast for
expansion and its more bearish expectations for the labor market
and inflation have made it difficult to predict the course of
monetary policy, according to Stanley, who said he’s
underestimated central bankers’ emphasis on their goal of full
employment. The Fed last month reiterated its plan to keep
borrowing costs “exceptionally low” through at least late
2014, in part to bring down “elevated” joblessness.

“I’ve been banging my head against the wall,” said
Stanley in Stamford, Connecticut, a former researcher at the
Federal Reserve Bank of Richmond, who had predicted an interest-rate increase as early as last year and now says the Fed
probably will tighten in the middle of next year. “They’re
willing to let things run for longer and let inflation
accelerate more than historically.”

Near Zero

The Fed has left its benchmark federal funds rate near zero
since December 2008 and in January extended its plan to keep the
rate low from an earlier time frame of mid-2013. Chairman Ben S.
Bernanke has also undertaken two rounds of asset purchases
totaling $2.3 trillion and is scheduled to complete a program in
June to push out the average maturity of the central bank’s
portfolio.

Bernanke signaled after the April meeting of the Federal
Open Market Committee that further easing isn’t likely unless
the outlook unexpectedly deteriorates. Even so, he said April 25
he’s “prepared to do more” if conditions worsen.

While policy makers upgraded their outlook in April, they
didn’t see a reason to change their 2014 horizon for low rates,
partly because they’re uncertain about their forecasts,
according to the minutes of last month’s FOMC meeting, which
were released last week.

Driving Point Home

“It’s like they’re talking out of both sides of their
mouth,” said Lonski, chief economist at Moody’s Capital Markets
Group in New York. “The Fed may be trying to drive home the
point to investors that, even if there is an unexpected upturn,
do not make the mistake of assuming the Fed will necessarily
begin to consider a firming of monetary policy.”

That may keep long- and short-term interest rates low and,
in turn, “help facilitate the realization of a firmer economic
recovery,” Lonski said. He predicts the U.S. will expand at a
2.2 percent rate this year.

Fed officials raised their prediction at the April meeting
for the pace of growth in 2012 to 2.4 percent to 2.9 percent
from their January projection of 2.2 percent to 2.7 percent. The
forecasts are the central tendency of 17 policy makers, which
excludes the three highest and lowest estimates. The full range
is 2.1 percent to 3 percent.

The median forecast in a Bloomberg News survey of 74
economists in May was for 2.3 percent growth this year, the same
as in a January poll. Gross domestic product expanded at a 2.2
percent annual rate in the first quarter.

Additional Stimulus

Several members of the FOMC said additional stimulus could
become necessary if the economy loses momentum or if “downside
risks to the forecast become great enough,” the minutes said.
Those threats include Europe’s debt crisis and a fiscal
tightening caused by the failure of U.S. lawmakers to agree on a
budget, the minutes showed.

More than $3 trillion has been erased from the value of
equities worldwide this month as concern that Greece will exit
the euro curbed demand for riskier assets. The country faces
elections scheduled for June 17 after inconclusive balloting
earlier this month put in second place a party opposed to
austerity measures required for international bailouts.

While the Fed has been more optimistic about the U.S.
expansion than the average analyst, its expectations for
inflation and joblessness have clashed with both economic data
and private forecasts. The Fed has a dual mandate of price
stability and full employment.

Policy makers have been projecting inflation of 2 percent
or less in 2012 for more than two years, even though the
personal-consumption-expenditures price index has risen by more
than the central bank’s target of 2 percent since April 2011.

Inflation Projections

The rate was 2.1 percent in March, and Fed officials
project inflation of 1.9 percent to 2 percent this year and 1.6
percent to 2 percent in 2013. That compares with January
predictions of 1.4 percent to 1.8 percent in 2012 and 1.4
percent to 2 percent next year.

The break-even rate for five-year Treasury Inflation
Protected Securities, the yield difference between the
inflation-linked debt and comparable maturity Treasuries, was
1.86 percentage points on May 18. The rate, a measure of the
outlook for consumer prices over the life of the securities, has
climbed from 1.53 points on Dec. 16.

“They’ve been a little reluctant to acknowledge or embrace
the changing growth-employment trade-offs,” said Feroli, chief
U.S. economist at JPMorgan in New York. “They are starting to
move their inflation forecast closer to reality,” and “they’re
also moving their unemployment-rate forecast closer to the
realized data.” He sees GDP expanding 2.4 percent this year.

Revised Jobless Forecasts

Central bankers revised their jobless projections in April
to 7.8 percent to 8 percent for 2012, down from their January
forecast of 8.2 percent to 8.5 percent. The rate fell to 8.1
percent in April from 8.5 percent in December.

Bernanke has been cautious about embracing the improvement.
The Fed chief has said the drop overstates gains as people who
can’t find jobs get discouraged and stop seeking employment,
which means they are no longer in the workforce.

The jobless level may continue to fall more rapidly than
the pace of expansion would predict, in part because of
structural changes to the economy, such as demographic shifts,
and a slowed rate of potential growth, according to a Barclays
Plc report this month.

“In terms of their mandate-relevant variables, they’re
coming closer to where most of the Street is,” Feroli said.

More Bullish

One reason the Fed is more bullish than Wall Street is that
central bankers are more optimistic about the impact of their
unprecedented stimulus, said Silvia, chief economist at Wells
Fargo Securities in Charlotte, North Carolina. He isn’t as
sanguine about the effects of monetary accommodation and
predicts growth of 2.1 percent this year and 2 percent next.

“The connective tissue in the models has just broken
down,” Silvia said. “The idea in the old days was you change
interest rates and people buy houses.” Now “when the Fed
lowers rates, that whole credit-money-multiplier process doesn’t
work as well.”

Central bankers have acknowledged their policies aren’t
having the impact they’d like, as evidenced in the difficulty
some borrowers face in refinancing their mortgages even though
interest rates have fallen. About 7.4 percent of residential
mortgage loans were delinquent nationwide as of the end of the
first quarter, according to data compiled by the Mortgage
Bankers Association in Washington.

William C. Dudley, president of the New York Fed, called on
the government in a Jan. 6 speech to help remove obstacles to
the transmission of monetary stimulus, suggesting that mortgage-finance companies Fannie Mae and Freddie Mac reduce the
principal of loans they guarantee.

‘Absolutely Egregious’

Republican Senator Bob Corker of Tennessee called Dudley’s
suggestion “absolutely egregious.” Dudley said Jan. 27 he was
“talking about issues that were basically impairing the ability
of monetary policy to support economic activity,” not trying to
“cause any sort of controversy.”

Even though the policies may fail to spur growth as quickly
as the Fed predicts, central bankers still may need to increase
rates before their “at-least-late-2014” plan, according to
Silvia. The FOMC probably will begin raising in the “spring”
of 2014, he predicted.

“I don’t think they’re going to make it until the end of
the year,” Silvia said, noting that the Fed “finally” boosted
its inflation forecast in April.